Office of the Historian

893.50/283: Telegram

The Ambassador in China (Gauss) to the Secretary of State

Chungking, December 8, 1942—4 p.m.
[Received December 10—6:58 a.m.]

1456. TF–73. To Secretary of Treasury from Adler.

Section I: Economic situation in Northwest.

1. Kansu and Sinkiang, previously two of most backward provinces of China, have made considerable economic progress in recent [Page 555] years. In Kansu, Central Government has initiated forestation, irrigation, and animal husbandry projects, and a number of industrial plants have been opened, both by Government and private enterprise, of which most striking is Central Government’s opening of Yumen oil field this year. It is now producing 250,000 gallons per month, gasoline having octane content of 40–45; main problem lack of refining equipment and drums. In Sinkiang, Provincial Government, apparently with Soviet assistance, has made substantial advances in improving breeds of livestock and quality of wheat and cotton, and in conjunction with private enterprise has made a start in developing a few light industries. Last year Tusan oil field began production; output now 150 tons crude oil a day. Acute shortage of imported goods in both provinces. There has recently been an increasing tendency for both Provincial Government authorities to introduce regulation and control of private trade and industry to an extent which has already had unfavorabe repercussions in Kansu and which may do so in Sinkiang.

Section II: Economic situation in Lanchow area.

1.
Lanchow, with population of 120,000, center of wheat producing area and commercial center for Kansu wool output. It has a number of woolen textile and flour mills, machine shops and match factories—some Government and some privately operated—and also some coal mines in vicinity.
2.
Prices in Lanchow less than two-thirds those in Chungking and still lower in rural areas, as all large cities constitute “pockets of inflation”. Even so, Lanchow prices over three times higher than in November, 1941. Retail prices in Lanchow, October 1942: general, 4300; food, 3420 (Farmer’s Bank, January–June equals 100). Rate of increase from July to October, 15 to 20% per month. Prices of imported goods have risen most and of goods from occupied territory next.
3.
1942 wheat harvest satisfactory.
4.
Operation of Kansu Provincial Government price control, initiated 2 years ago, presents a discouraging picture of excessive mercantilist regulations cramping individual initiative. Nine commodities controlled, and their official prices often set below cost of production to manufacturers and cost of purchase to merchants. Authorities have confiscated large stocks of goods—sometimes on minor technicalities—without releasing them to market; thus Bank of China had, in dollars, 70 million of goods confiscated from its go-downs 4 months ago, but they were merely transferred to Provincial Government go-downs. Result is that private factories are curtailing production, banks curtailing loans, and merchants moving their capital to less controlled area with consequent intensification of wartime scarcities. Control fully operative only in Lanchow.
5.
Central Government authority completely effective in Kansu.

Section III: Economic situation in Sinkiang.

1.
Population about 4 million, of which 60% Turkish and about 10% Chinese. Population largely concentrated around oases. The capital Tihwa is communications and political center, but Kashgar, Hi, and Turf an largest towns. Governor Shen restored internal peace in province largely by policy non-discrimination with respect to numerous racial groups comprising population. By doing so, he probably saved Sinkiang from fate of Mongolia.
2.
Sinkiang still has its own local currency which in 1938 was fixed at 3.20 to the United States dollar for trade purposes with Russia, no United States dollars actually being used. At end of October 1942 by agreement between Dr. Kung and Governor Shen, Sinkiang dollar fixed at SK dollars 4 equals 1 customs gold unit note (i. e. 20 fapi), which was admitted into circulation in Sinkiang for first time; this rate undervalues SK dollar sign. It was also agreed that Central Bank should open branch in Tihwa (Urumchi) in near future. Amount of SK dollar sign in circulation reported in Chungking to be SK dollar sign 32 million but this may be underestimate. Provincial Bank claims it keeps 60 percent reserve of gold and silver against note issue. Official price of gold SK dollars 400 and of silver SK dollars 5 per ounce, but amount of production unknown.
3.
Sinkiang economy varied in character. It is predominantly agricultural with fairly large livestock industry and wheat, cotton, rice and fruit cultivation. Production and trade carried on by private, Government and mixed organizations, while primitive nomadic barter form found side by side with fairly well equipped factories (with Soviet machinery and experts) and a modern credit institution, 60 percent Government owned and entirely Government operated, having 36 branches or agencies. Commercial production nearly 2 million tons per annum. Some wolfram deposits have been discovered but not yet worked.
4.
Prices far lower than in interior of China. In spite of extensive Provincial Government activities and expenditures, there appear to be no signs of inflation, primarily because Sinkiang is economically independent of rest of China. There was a bumper harvest this year and prices of foodstuffs reasonable and supplies adequate.
Economic conditions have been adversely affected since Soviet-German war by drastic curtailment of imports from Russia which is main source of supply of manufactured products. Trade with Russia carried on nominally in terms of United States dollars but actually on barter basis was monopolized by Government organization in November 1942. Worst shortages are in tires, tubes and batteries, medicines, cotton piece goods and light industry machinery.
5.
While there is considerable Government participation in economic life, it has not until recently unduly discouraged private enterprise despite obvious Soviet influence. However, there are signs of increasing Government control of prices and internal and foreign trade will tend to have same effect as in Kansu.
6.
Transportation. Main Sinkiang highway from Soviet to Kansu border excellent both as to physical layout and technical administration and in a journey of two and one half days from Tihwa to Hi near Soviet border, a distance of 650 km., I observed (a) 60 Soviet one and one half ton trucks a day, also large camel and donkey caravans, moving eastward with gasoline for Central Government; (b) note inward traffic; (c) well equipment and well managed rest houses at intervals of about 150 km.
7.
Influence of Chungking in Sinkiang has seen [been?] increasing, as evidenced by: (a) currency and banking arrangements lately concluded, mentioned in paragraph 2. (b) Presence of Central Government military agricultural and engineering experts, (c) Kuomintang Provincial party headquarters soon to be opened in Tihwa. (d) Provincial Government’s continued cooperation in transportation of Central Government’s imports via Sinkiang.

Section IV: Anything Board can do to facilitate imports into NW would undoubtedly contribute to ameliorating economic situation there as well as to consolidating position of Board. [Adler.]

Gauss